Is a 0% car loan really a good option?

A car buyer’s dream or a deal that's too good to be true?


Fact checked

When shopping for a new car, you’ll come across advertisements for car loans with extremely low interest rates — sometimes even 0%. This type of dealership-offered loan is generally a sales tactic simply to sell more vehicles. Before signing the dotted line and driving off the lot, there are some things you need to know about taking a 0% car loan.

What’s a 0% car loan?

A 0% car loan is a type of vehicle financing offered by dealerships that allows you to borrow money to buy your car without any interest charges. It’s like getting a free car loan – almost like paying for your car in cash.

Why would a dealership offer a 0% car loan?

There are different reasons dealerships offer zero interest car loans. One reason is to get potential buyers in the door. Once a buyer has entered into a salesman’s territory, the sales battle has begun.

Another reason is to move inventory. By offering a 0% car loan, they can get rid of the cars that have been in the lot too long and make a profit at the same time — even without charging interest on the loan.

The most common place to find 0% financing is through a dealership — banks and online lenders generally aren’t as worried about moving cars out of the lot at a fast rate. You can often find deals advertised online, at dealerships or on manufacturer websites. If you have liked working with a particular dealership in the past or have a specific carmaker in mind, you might want to start your search there.

Is a 0% car loan cheaper than a regular car loan?

If you make all of your payments on time and get a competitive price on your car, it can be. However, 0% car loans tend to have shorter terms resulting in monthly payments that are higher – often by hundreds of dollars.

But if you’ve been approved for a 0% car loan from a dealership, odds are good that you have great credit. You’ll probably be able to negotiate a competitive deal with a private lender.

0% car loans vs. rebates

Dealerships will often give the customer the option of a 0% car loan or a cash back rebate to be used towards the purchase price of the car. Figure out how much interest you will pay normally on the loan, without the zero interest car loan option. Compare that with the benefit of having cash on your hands now – will you apply the cash to the price of the car and decrease your interest payments, or will you use the cash for something else entirely?

It’s up to you to weight these factors and decide which option benefits you the most.

Can I qualify?

Despite what some ads appear to promise, you generally can’t qualify for 0% financing unless you have good or excellent credit. You also might have trouble qualifying if you already have a lot of debt obligations compared to your income.

Some customers feel that they were lured into a dealer with the promise of 0% financing that they weren’t eligible for. To avoid this, try calling the dealer ahead of time to make sure you’re eligible.

What’s the catch with a 0% car loan?

At first glance, a car loan with a 0% APR (Annual Percentage Rate) is exactly what it appears to be – you purchase the car at the agreed-on price, and then make monthly payments on the principal of loan sans interest. However, keep the following points in mind:

  • 0% interest may only be offered for part of loan term not the entire term.
  • To be approved, you’ll need spectacular credit.
  • Negotiating the price of the car will be difficult.
  • 0% may only be offered on some cars (always new cars, never used cars).
  • You may not get as much trade-in value for your old vehicle.
  • The loan structure will likely be set in stone with little room to negotiate down the road.

What are the benefits of 0% finance?

When it comes to financing a car, there are a number of options involving 0% loans that may work in your favour. When comparing loans, be sure to consider:

  • A shorter loan term. With shorter loan terms comes larger monthly payments. You’ll likely pay off your loan in just several years instead of the average 5 to 7.
  • No interest. Your payment goes directly towards the principal of the car.
  • Optional extras. With a 0% car loan you may be able to roll the cost of alloy wheels, leather interior, sunroof or any other luxury items into the financing.

Alternatives to 0% dealer financing

Even if you can’t secure a zero interest car loan, there are plenty of car loan options including auto title loans and low interest rate loans from dealerships, banks, credit unions, and online lenders. You may also be able to get a personal loan to finance a car. Have below-average credit? Not to worry. There are lenders who offer loans specifically for people who have bad credit or low incomes.

Did you know?

4 tips to make the most of 0% financing

There are few strategies to use that can help you use your loan as efficiently as possible when buying a car with 0% financing. These are:

1. Keep your loan under 60 months. There are longer car loans on the market that may seem attractive because of their low monthly payments, however, you’ll pay loads more in interest. By the time you’re done paying off the loan, your car will have depreciated greatly in value. But if you pay off the loan sooner, it will have a greater trade-in value should you wish to buy another vehicle.

2. Make a large down payment. By making the largest down payment your budget allows, you’ll lower the principal and may be able to take on a loan with a shorter term, which will make you the full owner of your car faster.

3. Get pre-approved. Getting pre-approved for a loan will not only give you bargaining power when shopping for a car, but you’ll also know exactly how much you’re able to spend.

4. Pick a car you love. Don’t rush into buying a car just because you’ve been offered a great financing deal. If the car isn’t the right fit for you, keep shopping so you don’t make a purchase that you’ll later regret.

Bottom line

You usually need to have excellent credit to qualify for a 0% car loan. Even if you do, be aware of how your loan terms may be structured before signing. If you don’t qualify for a zero interest car loan, research banks and private lenders to see if they can offer you a regular car loan with terms that are more suited to your financial situation.

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